Yet despite Russia’s enormous oil output, Russia’s economy is slowing. Excess power in the hands of Putin, plus the Ukraine crisis, are stoking ‘hot money’ outflows.
Not surprising that with all this new supply and a slowing economy, Moscow's resale apartment prices fell by 2.13% during the year to Q1 2014 - an 8% fall when adjusted for inflation. Prices of "used" Moscow housing fell more than all other Russian cities in 2013, according to the portal Mir Kvartir, to an average of RUB 189,200 (US$ 5,381) per sq. m..
Nevertheless, there was a surge in buying activity during the first half of 2014, most likely associated with the Ukraine crisis, according to Mir Kvartir.
“Demand has grown significantly - it is clear that buyers are seeking to get rid of the ruble,” comments Mir Kvartir.
“In part, this is an emotional reaction, the excitement caused noticeable weakening of the Russian currency,” according to Continent’s CEO Galina Garaeva.
In St. Petersburg resale apartment prices increased in nominal value by around 1.64% y-o-y to Q1 2014 - a 4.6% fall when adjusted for inflation.
In Russia as a whole, the price index for resale apartments rose by 3.11% y-o-y, according to the Federal State Statistics Service (Rosstat). But when adjusted for inflation, prices fell by 3.08%. Nominal price falls were seen in 10 of 46 Russian regions, compared to only one last year.
From 2000 to 2007 Russia experienced a massive housing boom, with secondary market prices skyrocketing by 436% while primary market prices rose 362%. Prices began falling in the second quarter of 2009, and since then there have been ups and downs - there was a 9.6% increase in average Moscow prices in 2012.
At RUB 49,939 (US$ 1,420) per sq. m. the average price of new apartments in Russia is still 5.4% down on the 2008 peak price.
Both locals and foreigners can own landed properties, according to the Land Code of 2001. The legislation was extended to Moscow in January 2006.
Analysis of Russia Residential Property Market »
Monthly rents per sq.m. in Moscow range from EUR 32 to EUR 41. This means that a 120 sq.m. apartment can be rented out for around EUR 3,800 per month.
In St. Petersburg, prices per sq.m. of apartments range from EUR 3,860 to EUR 6,600. This means that a 120 sq. m. apartment costs on average EUR 590,000 or EUR 4,900 per sq. m.
Monthly rents per sq. m. in St. Petersburg range from EUR 18 to EUR 20. This means that a 120 sq.m. apartment can be rented out for around EUR 2,100 per month.
Gross rental yields from apartments if fully rented range from 3.07% to 3.82% in Moscow, while in St. Petersburg, rental yields range from 3.46% to 6.20%.
Round trip transaction costs can be very high for foreigners buying residential property in Russia. See our Russia residential property transaction costs analysis Italy residential property transaction costs analysis and our Residential property transaction costs in Russia compared to other countries.
The rental income of foreign legal entities without a permanent establishment in Russia is subject to withholding tax, levied on gross rentals at 20%.
Effective Tax Rate on Rental Income
|Click here to see a worked example|
|Source: PWC Disclaimer|
Capital Gains: Capital gainsrealized by nonresidents for selling Russian property are taxed at a flat rate of 30%.
Effective Tax Rate on Capital Gains
|Property Value||€25,000||€2 million|
|Click here to see a worked example|
|Source: PWC Disclaimer|
Inheritance:There are no inheritance taxes in Russia.Residents: Residents are taxed on their worldwide income at a flat rate of 13%.
Rents: Rent is by agreement between the parties. However, rents can only be adjusted after one year.
Tenant Security: The tenant can only be evicted after non-payment of rent for six months. However, the tenant is given up to a year to amend the violation. The tenant can also cancel the contract anytime simply by giving a three months’ notice.
The IMF cut its estimate for 2014 growth to around 0.2% in April, the IMF’s fourth downward adjustment in a row from an earlier forecast of 1.3% growth.
The IMF cited the international sanctions imposed on Russia. The country is predicted to have a total capital outflow of about US$ 100 billion in 2014 as an outcome of the sanctions imposed by the European Union and the United States and the expected capital flight.
"The difficult situation and especially the uncertainty surrounding the geopolitical situation and follow up of sanctions and escalation of sanctions are weighing very negatively on the investment climate," according to IMF's mission head to Moscow Antonio Spilimbergo.
In contrast, Russian President Vladimir Putin’s economic aide Andrei Belousov predicts 1% GDP growth in 2014. "The sanctions in their current format don't have a macroeconomic effect," according to Belousov.
The country fell deep into recession in 2009, with GDP contracting 7.8%, after global energy prices dropped. It was Russia’s deepest recession in 15 years, after robust economic growth from 1999 to 2008 thanks to booming energy and commodities revenues. The recession was followed by a recovery, with Russia’s GDP growing by 4.5% in 2010, 4.3% in 2011 and 3.4% in 2012.
The recovery was followed by a 1.3% slowdown in 2013, the lowest economic expansion since 2009. The economy suffered from contractions in the utilities and construction sectors, as well as weaker export demand and falling domestic investment.
The ruble has fallen 6.2% against the dollar since January 2013, and is the worst performing currency among 14 developing markets in Europe. This is partly because the central bank initiated a policy in late 2013 of allowing the currency to fall further, hoping that a major currency devaluation over the next two years would boost exports.
Nevertheless, the country’s unemployment rate fell to a record low of 4.9% in May from 5.3% in the previous month, according to Rosstat, indicating that there is a worker deficit, according to Renaissance Capital economist Oleg Kouzmin.
With a falling ruble and tight labour markets, inflation has become a major concern. In June 2014, annual inflation rose to 7.8%, its highest level since August 2011, boosted by the ruble’s depreciation. Based on a poll by the Russian Public Opinion Research Centre in July 2014, 59% of the respondents named inflation as their top concern, an increase of a quarter on the previous year.
According to Finance Ministry’s strategic planning department director Maxim Oreshkin, inflation will start to decelerate in July.